There is an old adage that goes "never short a dull market." I couldn't agree with that more and want to stress that it does not say "go all-in and long a dull market." No, it says, "never short a dull market." If we have to get down to the core of what that statement says it is clearly telling us that when volume is no where to be found the LAST thing you want to do is go short stocks as you are leaving yourself open to a large short-squeeze as usually happens in low volume markets. But do not think that due it saying that it is never smart to be short a dull markets that it means it is OK to load up on longs and be very long a dull market. It means to, more-or-less, MAKE SURE YOU ARE NOT SHORT but do not worry about being long either. To sum it up it is simply saying "when there is no volume you should have all cash."
For those that do not understand why this is, it is not that hard to figure out. When stocks are moving up and down with no volume they become easy to manipulate by a few and when those few are manipulating stocks can move them and make them do whatever they want. I was just reminded that watching my favorite long pullback viciously on Friday. Volume was not that much above average yet the stock lost 9%. The stock is still above three supports, has green BOP still, and the reason for the trade still exist. So I will not be scared out of this long fully. But so many will be that it just goes to show how dangerous it is to be long in this low volume market.
While everyone focuses on GE..blah, blah, blah, I remind myself how stupid this stock is by looking at the returns you would have made since the start of the year in 2000. A negative 35%. Yes buy and hold is in fact THE MOST DANGEROUS way to invest. It is PURE GAMBLING AND HOPE at its best. You decide to hold something for the long hold and you are proving you are a true gambler. History has shown us over and over and over that the great stocks of the past NEVER last in this dynamic country. Yet, here we are all focused on GE. Even though it was a market mover, it is a giant distraction from what is really important and the new blood in the market.
About the only thing I guess I can judge by overall sentiment is that it appeared most were ready for the weak numbers that would then lead to buying as all the bad news would have been priced in. Well I guess it isn't as GE broke hard right at the 200 DMA and right below the 50 DMA. Even a mid-day rally was slapped lower. Not good for this big-bellwether. However, if you focus anymore on GE, after this paragraph, you truly need to go pick up a copy of 'Monster Stocks' by Boik. GE IS DEAD. DON'T EVER LOOK AT GE AGAIN. IT IS OVER FOREVER as a growth stock. If you are an income investor, then fine, whatever, but that isn't my style.
What I find more important to focus on is all the sentiment data. The University of Michigan Consumer Confidence came it at a 26 year low for April. This extreme lows shows that the crowd is very bearish right now. Is there anything else that can confirm this? Why, yes there is. The IBD/TIPP poll just the day before saw its numbers hit the lowest it has seen since the start. That number came in below 40 which was the first time ever for that index. So both of these consumer data points show the crowd is more pessimistic on their finances since right-before President Ronald Reagan made his way into the office. God bless you Ronny! :(
The good news about this is that the crowd is always wrong. They are. It is that simple. If you are out of high-school and run with the crowd, you have serious issues and I don't think reading this blog will help. I am a leader, not a follower, and that goes to my investment philosophy. When everyone else is scared and selling, while I don't necessarily want to buy I want to watch the smart money start to buy and then piggy-back off of them.
With sentiment that low I think we have a good enough reason to believe the crowd is too bearish out there. My only problem with this is that before the crowd became so BEARISH in late 2002 to early 2003 which led to the March FTD in 2003, we had a two year plus bear market. Here we are, now, less than six months since we topped in November, yet the crowd is already MORE bearish now than then. I am not sure if this extremely low reading means that the state of the market is so bad that this extremely bearish reading is just THE START of what is about to be a VERY ugly period. Or...we really have freaked out all the weak stock holders that they have finally capitulated, gone bearish, and now see their financial mess as the worst ever.
While I am not sure where we are at, as NO ONE CAN PREDICT THE FUTURE, I do know that I would rather be looking for longs here rather than shorts, as the negative sentiment has come on very fast for a five year plus bull market. Something just seems really wrong about that but if they were somewhat bearish the WHOLE WAY up and now they feel this way-I guess it does make sense.
Confirming this sentiment, are a few other key indicators. The bulls for the third week in-a-row came in lower than bears on the investors intelligence survey. The bulls come in at 37.4% while the bears continue their reign at 38.5%. It is bullish for stocks in the intermediate term when there are more bears than bulls. Now, while this is NOT a reason to start buying stocks, it is a reason to maybe start scanning the charts looking for the next group of leaders to buy. Sadly, that new "fresh" group is not showing up yet. I still have defensive, medical, commodity--soft and hard, and envrio. related issues leading the way. Throw in tobacco stocks and you have a real exciting group of leaders.
I guess this weak leadership with a lack of volume is the reason why people are getting very short. Now, while I have no problem going short a broken stock (MICC on 4/3 for example), I do have a problem going short based on the "theory" that the market is overbought and that economy is so weak that we just can't not be short stocks. I guess this is why I see the NYSE short-interest ratio hitting a brand-new five year high of 10.50.
A short interest ratio of 10.50 indicates that it would take 10 days of average market volume to unwind all short positions. It seems to me the public is EXTREMELY short at a point when it should not be that short. Like I keep saying, shorting a dull market is not only dangerous but historically it is deadly as low-volume short-covering rallies happen often. If a short-covering rally started here and it picked up volume as it went along forcing those to cover, it could turn into a nice vicious short-covering rally.
With the low volume it could be even worse, since the big boys will be on the sidelines not selling into the gains. This could lift stocks heavily way beyond what most would assume would be "rational." Obviously, this is just something to think about as low volume rallies happen often. Especially when the put/call is at 1.25. It seems like Friday's selling did turn the crowd quite bearish after the weak GE numbers.
Too bad they did not study volume. If they would have they would have noticed it was 4% lower on the NYSE and 14% lower on the Nasdaq which clearly shows that the selling was not intense and institutions stayed on the sidelines. This kind of lame selling on such a bad day is just like a huge up day on no volume: meaningless. There is nothing to really delve into. It simply is what it is: a low volume big move.
While there are things out there that personally scare me like 4% inflation (somewhere around 7-10% on Maui) it is getting hard to buy all the goods that I like to buy. This is definitely having an impact on my accounts as the poor stock market gains combined with loss of earnings power has wreaked havoc on my lifestyle. But since I am a simple man I find it easy to adjust and when I step back and look at things overall I just don't see it that bad. People are extremely bearish right now, via sentiment polls, and when the crowd is bearish I want to be bullish. Now that I see so many weak readings out there I can tell you that I would like to get very bullish.
However, the put/call, investors intelligence, VIX, and NYSE short interest ratio are not going to make me money. What is going to make me money is price and volume. I need some hot charts forming sound bases that are followed by breakouts on strong volume. If I can get more of this action, in high quality stocks, I would be very bullish on the short term. However, the lack of volume and long quiet bases has me still thinking that we have a lot more time before we can get a real rally.
Once we get some more backing and filling in the indexes, within an overall uptrend, we can then pray that some "fine" charts setup and breakout of sound patterns that can produce for us some "monster stocks" that go on to produce large gains. A VIX at 23 might inhibit that but still, at this point, I don't care if I get a 500% return. I will be happy with a few 100% returns. It is simply impossible to get greedy in the market when there is nothing to get greedy over. There is no speculative money pushing stocks higher.
Besides no speculative big money, there is no real institutional money either, as I see a LOT of high quality funds out there carrying cash positions from 5% to 25% all over the place. These funds are going to have to put that money to work eventually and if you take a look at the yield curve you will hope that stocks is going to be where it is at as a great bullish slope of the yield curve combined with the current low returns in bonds bodes well for stocks.
LOL, In fact, I can not turn anywhere without seeing headlines like this. I blinked and saw this: The American Bankers Association recently reported that in the fourth quarter of 2007, consumer credit delinquencies reached their highest level since 1992. This is the kind of constant negative drumbeats that cause the chicken-littles to sell after they already have big losses. It is possible this is just the start of something that is going to get out of control. But the way EVERY indicator/report is bearish, I find it hard to not want to lean to be bullish. All I need now is another higher volume 3% plus gain on the indexes with more green to max green charts making bases lasting at least 5-7 weeks. If I can get that, you can see my margin being unleashed as I start to load-up on ALL the best leading stocks.
Getting to some important numbers that I see: The Nassy now has an ACC/DIS rating of A- which is NOW very bullish, to go along with all the negative headlines. Like I said all I need now is that explosive day and better charts. This is made even better knowing that the Nassy fell 2.6%, yet the IBD 100 and 85/85 fell only 2% and 2.2% respectively. This is bullish RS and divergence from the overall market.
Too bad the leading stocks that make up this index all come from the exciting (sarcasm) and dynamic (not at all as they led from 03-early 06) groups of oil&gas, steel, chemicals, energy, machinery, building, transportation, and metal ores stocks. Combine those PAST leaders with medical, pollution control, tobacco, and media groups leading the way higher and we have a market that very well could be bullish in the short to intermediate term due to EVERYTHING!!! that I have posted today in regards to the sentiment direction.
However, for the long term, if you think the stock market is going to be higher a year from now you want to be long technological and innovative companies in brand new industries that are revolutionizing the way the world runs. These current leaders will NEVER be those kind of stocks. Our current leadership of energy and medical stocks will not change the world forever or make our lives better. They may DEFINITELY in their own way via research and development. But still this is not an airplane, car, or internet.
There are things that we need to watch for, of course. If the selling starts to come back into the market we will know that the low volume rally was actually a trap for the institutions to sell into. However, we have to see that happen to believe that. For now, it appears we are ready to drift higher. If they do knock us down further it shouldn't be that much of a surprise as the indexes are all back below the 50 DMA. But it is how they act here that will determine if the future is good or bad for the market.
I am being very patient, relaxing, watching, plotting, and waiting for that moment when to go all-in to the market. I want to be long the best patterns in the best stocks that are moving the most. When I can get some volume in this market, to the upside, I would love to get very active in my favorite longs like.....yeah right! :). If we continue to selloff, I am sure we can find some past-leaders that will have setup into some perfect short positions. Either way, no matter which way the market goes, I AM READY. Make sure you are to. Up, down, or sideways. I have a plan for all and I AM READY. :)
Before I go I want to take a moment to tell everyone how much I hate CLR a stock I went long on 3/13 and sold on 3/17 and 3/20. As you can see the stock is now up 30%; I took a 12% loss on my final sell. This is how the market is right now. I see so many stocks I was long, that I sold out of being disciplined, that are now hitting new highs. This DOES NOT HAPPEN IN BULL MARKETS. And I guess that proves that this is still a very mixed and choppy market.
Be ready for anything. I am expecting more upside relief, but I do not know if it will come with low or heavy volume. If it comes on heavy volume, I will be happy as I can start getting long the best of the best for some "monster" gains. However, if we rollover I am sure some 25-50% short sell winners will setup for me.
Life is great (especially without having to read NASTY comments) and if I go out and can find some surf either north or south today will have been a great day. It already has been a rocking weekend. Let's keep it up and roll this over into the work week for me, God!!! Aloha everyone. Thank you for reading my blog. I hope this can help you make money. If it doesn't, something is wrong with you. :)....or does that mean something is wrong with me? Whatever it is, it is all good, with me.
Maui No Ka Oi! Pray for surf!!
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